The chief executives of the UK's largest listed banks will feel relief to be, finally, in post at a time when the banking sector looks poised to make some decent returns from rising interest rates. Add in the certainty that more of the nation’s increasingly underused (and expensive to maintain) bank branches are likely to be closed this year, and the picture for profitability looks almost rosy.
Why then are banks still trading at multi-year discounts to their long-term average? Part of the answer is the general wariness investors still harbour towards banking shares, an attitude that has hung over the sector like a funeral shroud since the financial crisis in 2008. There is considerable truth in the investment saying that buyers worry about the past, while sellers fear the future. The question is whether that sentiment is now justified given that net interest margins are rising at their best rate in 20 years. If banks can limit their credit losses in the event of a prolonged recession, and there are enough households that can manage rising rates by simply reducing mortgage overpayments, then the possibility for a prolonged recovery is very much on the cards. The Bank of England’s own financial stability report at the end of last year gave the sector a clean bill of health, with the option of releasing the 2 per cent countercyclical capital buffer if more lending is needed to businesses and consumers.